Small businesses tend to
face obstacles securing loans. What do lenders
look for before they part with their money? Most
small businesses are established without
financial assistance from outside investors or
lenders. An entrepreneur armed with a big idea
for a small business typically gets established
with personal savings.

More commonly, he gets
monetary help from family and friends. Many
small business owners don't know where or how to
obtain outside backing. And many owners believe
that lenders won't consider their small
companies good investment risks.

Traditionally, small
businesses have more trouble getting small loans
than large companies have borrowing much greater
amounts. Most lenders consider small firms risky
because for every business that starts up, two
or three close down. Another major obstacle most
small businesses face is a lack of collateral.

Few have tangible assets
like inventory, buildings or equipment to offer
as security. And even if a business does own
property, it may not be able to get a loan if it
cannot demonstrate an ability to repay the
borrowed funds from future profits. A number of
lenders will not consider investing in an
endeavour if that ability is not
substantiated.
But, for the business owner
with a sound idea and a convincing presentation,
financial assistance is available.

Small businesses usually
need more than just cash: they need
"smart" money. This means, financing
that helps your business in the way that you
want it to, where the financier provides not
only capital, but also support and expertise for
the business. Smart money could be a guaranteed
loan that allows you to keep your ownership
interests intact until your business reaches the
stage at which you want to sell shares of the
business.

On the other hand, money
that comes from letting your brother-in-law
become a partner in your business because you
need his $5,000 before the end of the week might
be far more costly than you ever imagined.
Locating
"smart" money presents difficulty for
the entrepreneur because the capital market for
small businesses is imperfect and consists of a
great variety of under-publicised and poorly
organised financing sources.

Whether you are trying to
locate a bank that is willing to lend money to
your small business or whether you are looking
for a business "angel" who will
contribute needed equity capital, your quest for
financing will require that you devote the same
attention to obtaining capital as you give to
decisions involving the business's basic product
or service.

The Kind Of Financing You
Need

Commercial and inventory
loans, lines of credit, and accounts receivable
financing are sensible financing methods for
small businesses that don't have cash on hand.
These short-term loans are often granted to
borrowers who don't have substantial amounts of
collateral. As inventory is sold or payments on
accounts received, the business pays money back
to the bank. It's true, however, that
businesses with larger requirements need longer
term loans, which often require collateral.

For example, the
substantial expenses required for start-up, real
estate purchases, major expansion or
acquisition, are usually met with loans written
for five years or more. Some banks believe
personal assets should provide much of a
business' financing for start-ups, expansion and
acquisition, and may require a business owner to
get a personal loan using personal property as
collateral. Real estate loans or second
mortgages are borrowed against the value of
business-owned property.

In 1996, Singapore's
Productivity and Standards Board (PSB) was
established, and tasked with helping small and
medium-sized enterprises. Its Local Enterprise
Finance Scheme (LEFS) is one such initiative.
The LEFS provides low cost, fixed rate loan to
help companies finance industrial facilities,
machinery and equipment.

It also provides short-term
loans. Entrepreneurs may also
apply for Special Interest Rate (SIR), which
charges only 3.5 per cent per annum. These loans
may be used to establish a new business, to
modernise and improve infrastructure, to expand
manufacturing capacity or to diversify into
other product lines.

To secure venture capital,
a firm with a viable product and service may
seek assistance from the Economic Development
Board (EDB), which has established EDB Ventures
Pte. Ltd, for investments in local enterprises
with good potential.

Entrepreneurs who have
problems borrowing money from banks to fund
their business expansion because their companies
do not have track records or sufficient
collateral will soon have access to even more
assistance. The PSB will introduce next month a
new $200 million credit guarantee programme for
the small and medium enterprises (SMEs).

What Lenders Are Looking
For

Regardless of how
successful your enterprise or idea looks on
paper, lenders want to know where you will get
the money to repay their loans. You must build
the lender's confidence in your ability to repay
your loan - demonstrate your stability and your
solid reputation among associates and customers.

Most lenders whether they
are banks or financial institutions base the
decision to back your company on factors that
include: Examinations of credit reports on your
company, your loans and your fulfilment of their
terms; information from your suppliers about how
much credit they give you, how much of it you
use, and how you have performed on your credit
line; examination of your company's financial
statements, especially how closely your assets'
valuations reflect their true values; and your
written business plan. Lenders also want to see
that you have invested a substantial amount of
your own money in the firm, which means, you
should have put in roughly half the amount
needed for start-up - before seeking investors.

Venture capitalists look
for big opportunities, especially those with IPO
potential. Contrary to popular belief, most
modern venture capitalists do not make money by
investing and building great long-term
businesses. Many venture capitalists today sell
shares in their ventures as soon as they can
once the company goes IPO. So, unless your
company has IPO potential, and you wish to take
your company public, most venture financing is
realistically unavailable to you.

Some angel investors can
also contribute tremendous business insight and
experience. But, be especially careful to do
"due diligence" on your angel
investors. Be sure they can afford to make
aggressive investments in your business and that
they understand the risks. Agree, ahead of time,
what, if any, non-investment involvement the
angel will have with your company. Angels should
be labelled as "accredited investors,"
which is a fancy way of saying they are rich
enough and smart enough to make aggressive
investments.

With either angel investors
or venture capitalists, you will need to give up
partial ownership of your company. Very few
angels or venture capitalists will invest
without equity upswing potential. If you wish to
retain full equity (ownership) of your small
business, you will only have debt financing
available to you. This means, if you are lucky
enough to get a loan, you will be required to
pay back interest and principal, but you will
own 100% of your company.

"This article was
contributed by Christopher Lai, Director-Head of
Business Development, Small Business Services,
CSG, American Express International
Inc."